Only a few years ago, virtual currencies were little-known outside of the online video gaming community. Today, the total market value of the top one hundred convertible virtual currencies exceeds US$9 billion, and governments in the United States and throughout the world are struggling to determine whether, and how, virtual currencies should be regulated.

Virtual currencies offer consumers a new choice of payment method and are spurring significant investments in payments technology that have the potential to create further new options for consumers and investors in the future. However, current limited regulation and oversight applied to the virtual currency marketplace and transactions in virtual currency mean that consumers and investors that pay with or hold virtual currency are exposed to significant risks.

This white paper will describe the types of virtual currencies gaining prominence in the marketplace today, the roles of the players in virtual currency systems and transactions, the consumer and systemic risks associated with virtual currency systems, and potential regulatory
approaches to managing those risks. Part I of this white paper defines “virtual currency” and describes the current regulatory
environment for virtual currency in the United States. Part III of this white paper discusses the application of certain functional and prudential
payment systems regulations that may be applied to protect users of the Bitcoin system (and, by analogy, other convertible decentralized virtual currency systems).